01—Abstract
Summary
Summary of the 10-K filed March 23, 2000. Cited figures are marked; the original filing is the authoritative source.
ExxonMobil's 1999 Form 10-K reflects the first full year after the November 30, 1999 merger of Exxon and Mobil, which was accounted for as a pooling of interests, so all periods are presented as if the two companies had always been combined.
Reported 1999 net income was $7,910 milliona ($2.25 diluted EPS), down about 2% from $8,074 million in 1998. Excluding merger expenses and special items, earnings were $8,380 million, down 5%. Revenue rose 9% to roughly $186 billion, driven by higher crude prices, while the downstream (refining and marketing) segment was squeezed as crude costs rose about $14 per barrel over the year and could not be passed through to customers.
Upstream exploration and production earnings nearly doubled to $5,886 millionb on higher oil prices, which partly offset the downstream weakness. The merger carries both costs and expected benefits. Pre-tax merger expenses were $625 million in 1999, with cumulative charges expected to reach about $2.5 billion by 2002, and management targets $3.8 billion per year in pre-tax operating synergies by 2002.
Regulators require divestiture of roughly $3 billionc in carrying value of refining, marketing, pipeline and gas distribution assets, which the company expects to sell in 2000 for before-tax proceeds of $4 to $5 billion. Capital and exploration spending fell to $13.3 billion from $15.5 billion, and free cash flow funded a dividend of $1.687 per share, with a payout of about 74 percent of earnings. Total consolidated debt rose by $2.0 billion to $19.0 billion, and the debt-to-capital ratio increased to 22 percent.
The main investor risks are the unresolved $5.058 billiond Exxon Valdez punitive-damages judgment under appeal at the Ninth Circuit, the integration execution required to realize merger synergies, the timing and proceeds of asset divestitures, and continued commodity price volatility. Management's view is that the company's size and diversification, along with its disciplined asset management, leave it well positioned across a range of market conditions.
02—Key points
Key Highlights
- Net income of $7.91 billion in 1999 (diluted EPS $2.25) versus $8.07 billion in 1998; excluding merger expenses and special items, earnings were $8.38 billion, down 5%.
- Upstream (Exploration and Production) earnings rose to $5.89 billion from $3.35 billion, benefiting from crude oil prices up over $5 per barrel on average versus 1998.
- Downstream refining and marketing earnings fell to $1.23 billion from $3.47 billion as crude costs rose about $14 per barrel during 1999 and could not be fully recovered in the market.
- Merger with Mobil completed November 30, 1999 (about 1.0 billion shares issued); $625 million pre-tax merger expenses recorded, with about $2.5 billion cumulative expected by 2002 and $3.8 billion per year of pre-tax synergies targeted by 2002.
- Approximately $3 billion in carrying-value assets must be divested for regulatory approval, with expected before-tax proceeds of $4 to $5 billion in 2000.
- Capital and exploration spending declined to $13.3 billion from $15.5 billion; operating cash flow was $15.0 billion, and dividends of $1.687 per share totaled $5.9 billion.
- Debt rose $2.0 billion to $19.0 billion (debt-to-capital ratio 22%), and share repurchases were suspended after the merger closed; the $5.058 billion Exxon Valdez judgment remains under appeal.
03—Questions
Frequently Asked Questions
Why did reported earnings decline in 1999 even though oil prices rose?
Crude oil prices rose roughly $14 per barrel during 1999, which sharply increased the cost of crude feedstock for the refining and marketing business. Refining margins were depressed in all geographic areas because these costs could not be passed through to customers. Upstream earnings rose strongly on higher prices, but the downstream decline, weaker chemicals margins, lower coal prices and $625 million of pre-tax merger expenses reduced reported net income to $7.91 billion.
What are the expected financial benefits of the Exxon-Mobil merger?
Management expects pre-tax operating synergies, including cost savings and efficiency gains, to reach $3.8 billion per year by 2002. Realizing these benefits depends on integrating the two businesses successfully and on schedule, and the filing notes that management attention may be diverted from other strategic opportunities during integration. Cumulative merger-related expenses are expected to reach about $2.5 billion by 2002.
How will the required asset divestitures affect the company?
Regulators (the U.S. Federal Trade Commission and the European Commission) require the sale of refining, marketing, pipeline and natural gas distribution assets with a carrying value of about $3 billion. These assets have historically earned about $200 million per year. Before-tax proceeds of $4 to $5 billion are expected in 2000, which would produce a gain over book value but also remove some earnings from the company.
What is the main legal risk disclosed in the filing?
The most significant contingency is the $5.058 billion judgment from the 1994 Exxon Valdez civil trial, which includes $5 billion in punitive damages. The company has appealed, and the Ninth Circuit heard oral arguments in May 1999. Management believes the punitive damages are unwarranted and that the judgment should be set aside or substantially reduced, but says the ultimate cost cannot be predicted and may not be resolved for years. A $6.75 billion letter of credit stays execution pending appeal.
How is the company's balance sheet and dividend position?
Total assets were $144.5 billion and shareholders' equity was $63.5 billion at year-end 1999. Total consolidated debt increased by $2.0 billion to $19.0 billion, raising the debt-to-capital ratio to 22 percent. The quarterly dividend was $0.4165 per share through the third quarter and $0.4375 in the fourth quarter, for a full-year dividend of $1.687 per share, equal to about a 74 percent payout. Share repurchases were suspended following the merger.
04—Continue